Saturday, August 4, 2012

Tyler Cowen on the Latest Mario Draghi Eurozone Dance Steps

Cowen has it pretty much nailed:
I understand the latest as follows: Draghi basically understands the problem, but is hemmed in by Germany. He is now to some extent freelancing and daring Germany to pull him back in. He’ll print money to target short-term yields for the debt of the periphery, which he feels Germany might eventually accept, for lack of better alternatives and because it also keeps up the pressure for policy reforms. He’s rather audaciously trying to redefine what the ECB’s mandate should be taken to mean by defining a lot of “extracurricular” activity as keeping the system up and running. He’ll push for the banking license for ESM (which would allow them to significantly expand what they do and in essence bypass some of the charter restrictions on the ECB itself), which he probably feels Germany won’t accept but what the heck he’s gotten this far so why not keep on trying? It’s easy enough to criticize him for not having made any kind of full commitment, but he’s already played more of a dare game than most observers thought possible. I say he is doing a high-quality tightrope act which probably will fail but which increases the chance of the whole thing pulling through.

He’s daring the Germans to zap him, knowing he stands some chance of going down in history as the central banker who saved the eurozone, knowing that he has nowhere else to go, knowing the Germans have nowhere else to go, and knowing that he has nothing to lose from being fired or otherwise emasculated. He also knows he has a lot of other eurozone nations on his side.

Just not the ones who will end up paying the bills.
That's the situation as it stands, Cowen has got it. However, Cowen could have gone further to mention the severe price inflation consequences if Draghi gets his way, and that a true libertarian position would be to call for default on sovereign debt by those who have issued so much debt---so that those who own the debt, and thus propped up the profligate spending, would be the ones to suffer the consequences rather than all citizens of such states, through greater taxation and inflation.

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